Last Week in Event SPACE: Celltrion, Glow, BWX, Nihon Nohyaku, JLT, Unicom

Last Week in Event SPACE ...

• This placement in Celltrion Healthcare (091990 KS) should be different as its third Singapore plant breaks ground plus positive US FDA news
• The anti-trust issues surrounding the Global Power Synergy Company Ltd (GPSC TB)/Glow Energy Pcl (GLOW TB) appear overdone
• Despite Bain walking, BWX Ltd (BWX AU)'s growth may shine through as new CEO Anceschi has a long history in FMCGs and success in Australia, and market growth of naturals continues unabated
• Complaints about Adeka Corp (4401 JP)'s bid to acquire a majority in Nihon Nohyaku (4997 JP) may come too late
• Marsh & Mclennan Cos (MMC US)'s tilt for Jardine Lloyd Thompson Group P (JLT LN) is a lock with Jardine Matheson Hldgs (JM SP)'s resolute backing
• Unwind Takara Holdings (2531 JP)'s stub after its post-N225 non-rebalance outperformance
• A China Unicom (762 HK)/China Telecom (728 HK) merger would create a true competitor to China Mobile (941 HK)

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events - or SPACE - in the past week)

Celltrion Healthcare (091990 KS) (Mkt Cap: $11.8bn; Liquidity: $67mn)

Early this week, One Equity Partners (JPM) sold 4mn shares (2.85%) at a 7-9% discount to the Sep 18 closing price (₩99,000). After the placement, One Equity's shareholding fell to 15.22%.

• When Temasek sold 2.9mn shares in a block deal in March of this year, Celltrion Healthcare (091990 KS) plunged 11.9%. Celltrion Inc (068270 KS) also took a harsh hit and fell 12.2%. Sanghyun believes this placement will be different.
• Local news carried an exclusive report about Celltrion confirming the construction of its third CMO plant in Singapore, which is believed to be assisted by Temasek. The other is that Celltrion publicly said that it had received the EIR (Establishment Inspection Report) from the US FDA on Sep 17, which states that Celltrion's manufacturing process does not have any non-compliance issues.
• Earlier this week, Sanghyun Park advised going for a long/short on Celltrion/Celltrion Healthcare. As a result of this placement, the market cap ratio of the Celltrion duo peaked at 2.85629 at the Sep 19 closing prices, a 6-month high. Is this a ceiling? Sanghyun believes so and recommends closing out the Long/Short trade. (The Celltrion duo have no cross holdings - but they are basically one company. Celltrion Healthcare is Celltrion’s internal sales unit. So business fundamentals-wise, they are closely correlated.)

links to Sanghyun's insight:
Close Long/Short on Celltrion/Celltrion Healthcare: Market Mood on Placement Is Surprisingly Mild
Celltrion Healthcare Placement: Two Mitigating Factors, Short Healthcare But Long Celltrion

Briefly ...

The Hyundai Motor Co (005380 KS) / Kia Motors Corp (000270 KS) market cap ratio fell below 2.0 for the first time. According to Elliott's revised plan, Kia Motors will sell its Hyundai Mobis (012330 KS) stake to the owner family. This means Kia Motors can become the biggest beneficiary of this restructuring event. Sanghyun doesn't see it this way and recommends being long HMG and short Kia. (link to Sanghyun's insight: HMC/Kia Pair: Kia Got Overheated for a Wrong Reason, Long HMC / Short Kia)

Glow Energy Pcl (GLOW TB) (Mkt Cap: $4.1bn; Liquidity: $7.4mn)

A decision by the Energy Regulatory Commission (ERC) on the acquisition of a 69.11% stake in Glow Energy Pcl (GLOW TB) by Global Power Synergy Company Ltd (GPSC TB) is expected to be finalised next month.

• Although the Glow-GPSC market share would be <10% on a national level, the central anti-trust issue focuses on Map Ta Phut in Rayong Province, where Glow controls 60% of the PPAs and GPSC 20%. Former Finance Minister Chatikavanij Korn contends this establishes a monopoly. He also questions GPSC, an SOE, potentially competing with private companies.
• Yet that assertion appears inflated as Map Ta Phut is just one of Thailand's many industrial parks; SPPs like Glow and B Grimm Power (BGRIM TB) sell a material amount of power via industrial contracts; one does not "own" the PPAs, as they are agreements between an IPP (or SPP) and EGAT, which in turn is owned by the Ministry of Finance; while a number of PTT subsidiaries are already Glow customers.
• Assuming deal completion near the end of December, this backs out a gross/annualised spread of 7.2%/31%, a pretty decent risk-reward. While challenging to properly assess the probability of the ERC pushing back on this deal, the anti-trust concerns appear overstated. The downside from here is probably ~6% to the Bt83-84/share level.

(link to my insight: Anti-Trust Should Be A Non-Issue In The GPSC/Glow Deal)

BWX Ltd (BWX AU) (Mkt Cap: $367mn; Liquidity: $2.3mn)

Twelve weeks of due diligence plus a two-week extension was not enough to get Bain over the hurdle and so they walked away from its non-binding indicative proposal for BWX. The stock tanked as much as 8% on the news.

• Target prices from after the Earnings Presentation are 40% higher than here. The strategy in the Earnings Presentation is to expand growth using existing brands, and is exactly what a strategic or financial buyer who shows up later would want to see.
• The brands are not magic, but the drag on shareholder capital from overpriced acquisitions is now "over" and the drag on shareholder return from dilution owed to Mssrs Humble and Finlay taking advantage of the terms of a ludicrous incentive package is also done, and the stock is about half of where it was at its peak in January post-rights offering.
• Travis Lundy is bullish the stock because the price is low enough and the strategy at the company studied enough now to allow for a decent runway on existing brands. All indications are that there has been a significant effort at improving logistics and synergies of distribution.

(link to Travis' insight: Bain Bails on BWX, BWX Bails on Old Management, Myles Anceschi At the Wheel)

Nihon Nohyaku (4997 JP) (Mkt Cap: $438mn; Liquidity: $1.7mn)

ADEKA owned 16.176mm shares or 23.1% of shares out. The plan was to buy up to 12.056mm shares taking them to 40.33%, then purchasing an extra number of shares of 11.94mm shares or more which would get them to 51%, on the condition that the minimum share purchase in the Tender Offer (7.668mm shares) was effected.

• US investment advisory firm Usonian raised a complaint saying that ADEKA's bid to acquire a majority went against Japan's Corporate Governance Code as it treats shareholders unfairly. Usonian has a point. If Adeka wants to get to 51%, purchasing all the shares at the premium price is substantially fairer to minorities.
• If Nihon Nohyaku does not do something, a group of 10+% of shareholders can, via Article 206-2(4) of the Companies Act.
• The tender closed with a 38.3% pro-ration. Travis believes Usonian's comments arrived too late, Nihon will make some perfunctory announcement but do nothing, and that will be that.

(link to Travis' insight: ADEKA Bid for Control of Nihon Nohyaku Runs Into Controversy)

Jardine Lloyd Thompson Group P (JLT LN) (Mkt Cap: $5.2bn; Liquidity: $13.5mn)

JLT has received an offer from Marsh & Mclennan Cos (MMC US), by way of a scheme, at £19.15/share, a 33.7% premium to last close. Jardine Matheson Hldgs (JM SP), which holds 40.16% in JLT, has given an irrevocable to vote in favour of the scheme. This irrevocable is locked up and cannot be unwound should a superior offer emerge.

• The deal has approval from both boards plus the backing of the major shareholder with ~40%. The absence of a break fee underscores that the boards of both companies want to work together to get this deal over the line. Debt-funding for the deal has been secured, as required by UK guidelines at the time of the offer.
• The announcement guided a spring 2019 completion or ~6 months from the announcement. This backs out a gross/annualised spread of 1.9%/3.8%. Even applying an accelerated time frame achieved in other schemes of around 3 months, that still equates to an annualised spread of ~8%. That's tight, suggesting this deal is priced to complete. The offer is not final.

(link to my insight: Matheson's Support Locks Up Marsh & McLennan's Offer For JLT)

Melco Resorts and Entertainment (Philippines) (MRP PM) (Mkt Cap: $729mn; Liquidity: $0.5mn)

Subsequent to Melco Resorts & Entertainment (MLCO US)'s voluntary Tender Offer announced last week for MRP, in conjunction with a proposed voluntary delisting of MRP, MLCO filed its initial Tender Offer report (SEC Form 19-1) with the SEC and also submitted the report to the PSE.

• FTI Consulting Philippines provided a fair value range of PHP6.11-PHP7.49 - vs. the Offer price of PHP7.25 - and concluded the Offer to be fair.
• Should shareholders decide not to tender their MRP shares and MRP is subsequently delisted (with PSE approval), they will remain shareholders of MRP.
• The Tender Offer opens on the 3 Oct and closes on the 30 Oct. Consideration is expected to be paid on the 19 Nov. Tendering shareholders will receive proceeds net of customary selling charges of 0.621% (excluding broker commissions). This backs out a gross/annualised spread of 2.9%/19.9% on a net basis, before broker comms.

(link to my insight: Melco Philippines' Delisting Offer Update)

Ukc Holdings (3156 JP) (Mkt Cap: $374mn; Liquidity: $1mn)

Sony Corp (6758 JP)-linked smallcap ($300-350mm each) semiconductor wholesalers UKC and Vitec Holdings 9957 JP) announced they had agreed to merge as of April 1, 2019, with UKC being the surviving entity.

• The deal is not terribly fair on a long-term basis. This is Vitec selling themselves to UKC opportunistically.
• This deal appears to be a deliberate attempt to keep the Murakami Gang - 10.88% holder in UKC - from becoming more of a nuisance. The short period before the record date is designed to keep the change in shareholding as small as possible before the EGM. This is designed to not allow UKC shareholder activists to enter or substantially increase their position before the vote.
• At the time of writing, Travis was very-near-term bullish because while he thought the deal would go through as planned AND expected the prices of the shares to fall over time (because they are expensive), he thinks in the very near-term one could see the shares go higher.

(link to Travis' insight: UKC/Vitec Merger To Bring Murakami Gang Activism?)

Briefly ...

A rumoured China Unicom (762 HK)/China Telecom (728 HK) merger makes sense as it would help level the playing field by creating a true competitor to China Mobile (941 HK), improve returns (a key agenda item of SOE reform), and drive 5G network scale faster than what would be possible without a merger. New Street Research estimates the synergies associated with this merger could be worth US$50bn, or more, and highlight the upside potential for Unicom and Telecom shareholders, and downside for China Tower (788 HK).
(link to New Street's insight: China Telecom/Unicom Merger Opportunity to Large to Ignore? We See $50bn+ Synergy Value (Or More))

Daeduck Electronics Co (008060 KS is the surviving entity in the Daeduck merger announced early last month, with a merger ratio between Electronics and Daeduck GDS (004130 KS) of 1:1.6072719, which means you get 45 Electronics shares for 28 GDS shares. The risk arb spread is 4% before commissions and borrow cost.
(link to Sanghyun's insight: Daeduck Merger Event - Spread Is Currently at 4+%, Why Not Enjoying It)

Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP)

JM has backed Marsh & Mclennan Cos (MMC US)'s Offer (by way of a scheme) for Jardine Lloyd Thompson Group P (JLT LN) at £19.15/share. With the support of both boards & JM's indissoluble irrevocable, this looks a done deal.

• After touching a 17-year low ratio level of 1.41x (JM/JS) last September, it has been all one-way for Matheson, as it trades around the long-term average of 1.7x. The yield spread of 1.73%, in favour of JM, compares to the long-term average of 1.64%. JM could pay out a special dividend from the JLT sale proceeds which translates to ~$2.90/share. This compares to the total estimated dividend payout in FY18 of $1.64 (interim of $0.42 + final of $1.22).
• However, at ~45% discount to NAV, proceeds would be more prudently applied to increasing its stake in JS, as there is still some room before the maximum 85% ownership level is reached.

• With the simple ratio in no man's land, I'd recommend buying into JS for its attractive NAV discount and the possibility of JM increasing its holding.

Takara Holdings (2531 JP) / Takara Bio Inc (4974 JP)

Takara is up ~40% in the past two weeks. I peg the discount to NAV at 4.8%, slightly wider than the 12-month average of ~2%.

• Travis Lundy discussed Takara in his insight JAPAN PASSIVE: The Nikkei 225 Baskets if BOJ Changes, with the stock potentially coming under pressure following changes to the BOJ ETF buying programme - be it an exclusion from the index or a downward reweighting. Curtis Lehnert recommended a stub-set-up late last month and I also discussed the stub trade in this insight.
• The surprise outcome was the news that there was no news, and Takara was not excluded or reweighted down. Travis expected Takara to bounce big as shorts covered and he wasn't wrong. Curtis recommended closing out the set-up trade. That looks like good advice.

links to:
Curtis' insight: Takara Holdings (2531 JP): Stock +27%, Close the Stub Trade
my insight: StubWorld: Matheson Unloads JLT, Unwind Takara

My ongoing series flags large moves in CCASS holdings over the past week or so (~10%), moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.

Often these moves can easily be explained - the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.